Upscaling Pakistan’s tech industry can catapult Pakistan’s growth
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Pakistan’s portfolio of exports has remained concentrated in a few products, shipped out by a narrow band of exporters to a handful of markets for decades. Rather than value-added finished products and services, primary and intermediate goods make up much of its exports. For example, the textile industry alone accounts for almost 60 percent of the export value of merchandise and approximately half of total exports in 2020. Agriculture products accounted for an additional 20 percent of goods exports.
Over the last decade, Pakistan’s goods exports have remained range-bound between $22-25 billion annually, but exports of knowledge-based services, primarily related to information, computers and telecommunication (ICT) have grown almost tenfold from $217 million in fiscal year 2011 to $2.12 billion in 2021. At less than 7 percent of Pakistan’s overall exports, this is still relatively insignificant compared to India’s ICT exports of over $150 billion, which is almost 50 percent of the country’s total exports.
Although it has a very small presence in the global value chain (GVC) of ICT services, Pakistan enjoys latent comparative advantages of a sizeable talent pool, cost arbitrage, and strong business linkages with Pakistani-Americans, which have provided an opportunity for Pakistan to grow fast as it is doing recently. Pakistan also produces over 20,000 ICT graduates each year, helping to launch over 700 tech start-ups since 2010, the majority of which continue to be in business. It has the world’s third-largest population of almost 95 million with a working knowledge of English, a decent telecommunications infrastructure and a thriving freelance industry that is ranked fourth globally in terms of number of freelancers engaged in software development and technology. All this demonstrates incipient success of the ICT sector, and also highlights potential availability of a rich and growing talent pool.
About half of Pakistan’s $2.12 billion exports in ICT services were to the US, followed by the UAE and the EU. Pakistani-Americans have led the expansion of the industry, building on their strong business ties in the US. Although exports are concentrated in low-value-added services within the Information Technology Outsourcing (ITO) and Business process outsourcing (BPO) segments, including freelancing, Pakistani individuals and firms have developed global competitiveness in a subset of emerging services, positioning themselves as potential leaders in technology fields.
About half of Pakistan’s $2.12 billion exports in ICT services were to the US, followed by the UAE and the EU. Pakistani-Americans have led the expansion of the industry.
Javed Hassan
There is clear headroom for the development of sufficiently large companies to absorb the growing number of skilled knowledge workers, but the growth trajectory has been held back by funding constraints. However, recent success in the sector has resulted in increased venture capital interest that is helping accelerate the growth of technology-based startups, which can absorb talent to become part of the formal economy, and scale up to enterprise levels in short time scales.
In the current year, startups have so far raised $85 million in venture capital funding, or 29 percent growth over the $66 million raised in 2020. While this is minuscule by global standards, the encouraging sign is the increasing participation of overseas investors. For example, Kleiner Perkins made its first investment in the country with $17mn for Tajir, a business-to-business online platform.
The government is also finally taking this sector seriously and implementing its Digital Pakistan Policy to accelerate and transform the ICT sector. The initiatives hope to boost organic growth in order to help the sector take off with a steeper growth trajectory. A critical area of focus should be to build human capital by developing programs for skills enhancement through coordination with private companies. Targeted improvements in the quality of education, especially at the tertiary level to address the shortfalls perceived by global industry players, will go a long way in supporting firms’ efforts to provide higher-end solutions.
The government is also looking to establish specialized infrastructure in the form Special Technology Zones (STZs) with industry coordination, to help unlock Pakistan’s potential by encouraging increased FDI in the sector. The provision of Internet infrastructure, data centers, and other such facilities will help overcome constraints associated with operating in an unfamiliar environment.
While the government should help the sector build on its elements of inherent value addition by facilitating the enabling conditions and targeted interventions, it should avoid providing tax holidays, direct subsidies, and other such distortive tax arbitrage schemes, which are likely to encourage rent-seeking behavior rather than increase the sector’s inherent competitiveness and entrepreneurial spirit.
Ensuring high-quality and affordable round-the-clock clusters of talent and work space should provide sufficient boost for the Pakistani ICT sector to leverage its organic development and cultivate its brand worldwide as a cost-effective and qualified hub for higher-value-added services. The sector provides the country with a pathway for moving into technology and knowledge-based activities, which are the building blocks for a more sophisticated economy that is not only likely to boost overall economic growth, but can also potentially help catapult the country’s convergence with developed countries.
*Javed Hassan is Chairman Economic Advisory Group (EAG). He’s an investment banker by training and has worked in senior executive positions both in the profit and non-profit sector internationally.
Twitter: @javedhassan
